6.

2 STANDARD COSTING & VARIANCE ANLYSIS

Standard Cost:
the predetermined cost that is calculated at the management’s standards
”.

to their utmost, the expenditure incurred for producing the product can be taken as standard cost.

many industrial engineering techniques such as work measurement, method study, time and motion

Standard Costs and Estimated Costs:

The distinction between Standard Costs and Estimated Costs should be clearly understood. While both
Standard Costs and Estimated Costs are predetermined costs, their objectives are different. The main
differences between the two types of costs are:

3. In Estimated Costing Systems, stress is not so much on cost control, but costs are used for other

tools for cost control.

Setting of Standard Costs:
While setting production costs standards, the following preliminaries should be considered:
a. Study of the technical and operational aspects of the concern, such as methods of manufacture
and the processes involved, management of organisation and line of assignment of responsibilities,
division of the organisation into cost centres, units of measurement of input and output, anticipation

b. Review of the existing costing system and the cost records and forms in use.
c. The type of standard to be used, i.e, whether current, basic, or normal standard costs are to be set.
The choice of a particular type of standard will depend upon two factors, viz. which type would
be most effective for cost control in the organization, and whether the standards will be merged
in the accounting system or kept outside the accounts as statistical data.

is ultimately to be laid on individuals or departments, it is but natural that all those individuals or
departments should be associated with the setting of standards.
Stock Valuation:
The function of a Balance Sheet is to give a true and fair view of the state of affairs of a company on
a particular date. A true and fair view also implies the consistent application of generally accepted
principles. Stocks valued at standard costs are required to be adjusted at actual costs in the following
circumstances:

COST ACCOUNTING 341

Cost Accounting Techniques

(a) As per Accounting Standards – 2, closing stock to be valued either at cost price or at net realisable
value (NRV) whichever is less.
(b) The standard costing system introduced is still in an experimental stage and the variances merely
represent deviations from poorly set standards.
(c) Occurrence of certain variances which are beyond the control of the management. (Unless the
stocks are adjusted for uncontrollable factors, the values are not correctly started).
Maintenance of Raw Material Stock at Standard Cost:
In the single plan, the inventory in the stores ledger may be carried either at standard costs or at actual.
Although both the methods are in use, the consensus is in favour of standard costs. The advantages of
adopting standard costs for inventory valuation are as follows:
a. Stores ledger may be maintained in quantities only and the standard price noted at the top in the
ledger sheets. This economises the use of forms as well as reduces clerical costs as no columns for
rates need be maintained.

required to be used.
c. Price variance is promptly revealed at the time of purchase of material.
The disadvantages are:
a. The stores ledger does not reveal the current prices.
b. If the material stock is shown in the Balance Sheet at standard costs, the variances have the effect

actual cost based on price variance to comply with the statutory requirement of the Companies
Act, 2013.
c. A revision of the standard necessitates revision of the cost of the inventory.

Difference between Standard Costing and Budgetary Control:

supervision and responsibility and it aims at managerial control by comparison of actual performances
with suitable predetermined yardsticks. The basic principles of cost control, viz., setting up of targets
or standards, measurement of performance, comparison of actual with the targets and analysis
and reporting of variances are common to both standard costing and budgetary control systems.

conceptually there is not much of a difference between standard costs and budgeted and the terms
budgeted performance and standard performance mean, for many concerns one and the same thing.
Budgets are usually based on past costs adjusted for anticipated future changes but standard costs
are of help in the preparation of production costs budgets. In fact, standards are often indispensable
in the establishment of budgets. On the other hand, while setting standard overhead rates of standard

if necessary. Thus, standard costs and budgets are interrelated but not inter-dependent.
Despite the similarity in the basic principles of Standard Costing and Budgetary Control, the two systems
vary in scope and in the matter of detailed techniques. The difference may be summarized as follows:
1. A system of Budgetary Control may be operated even if no Standard Costing system is in use in
the concern.
2. While standard is an unit concept, budget is a total concept.
3. Budgets are the ceilings or limits of expenses above which the actual expenditure should not

342 COST ACCOUNTING

4. Budgets are complete in as much as they are framed for all the activities and functions of a concern
such as production, purchase, selling and distribution, research and development, capital utilisation,
etc. Standard Costing relates mainly to the function of production and the related manufacturing
costs.
5. A more searching analysis of the variances from standards is necessary than in the case of variations
from the budget.

to further possible improvements.

Advantages of Standard Costing:
The advantages derived from a system of standard costing are tabulated below:

is measured.
2. The standards provide incentive and motivation to work with greater effort and vigilance for

and operations are effected and waste of time and materials is eliminated. This assists in managerial

of forms and records are required.

stock and determining idle capacity.

planning.

department or individual. This also tones up the general organisation of the concern.
8. Variance analysis and reporting is based on the principles of management by exception. The top
management may not be interested in details of actual performance but only in the variances
form the standards, so that corrective measures may be taken in time.
9. When constantly reviewed, the standards provide means for achieving cost reduction.
10. Standard costs assist in performance analysis by providing ready means for preparation of
information.
11. Production and pricing policies may be formulated in advance before production starts. This helps
in prompt decision-making.
12. Standard costing facilitates the integration of accounts so that reconciliation between cost accounts

13. Standard Costing optimizes the use of plant capacities, current assets and working capital.
Limitations of standard costing:

2. In course of time, sometimes even in a short period the standards become rigid.

4. Sometimes, standards create adverse psychological effects. If the standard is set at high level, its
non achievement would result in frustration and build-up of resistance.

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Cost Accounting Techniques

5. Due to the play of random factors, variances cannot sometimes be properly explained, and it is

6. Standard costing may not sometimes be suitable for some small concerns. Where production cannot
be carefully scheduled, frequent changes in production conditions result in variances. Detailed

7. Standard costing may not, sometimes, be suitable and costly in the case of industries dealing
with non-standardized products and for repair jobs which keep on changing in accordance with

ineffective. This limitation, of course, applies equally in the case of any other system which the
management does not accept wholeheartedly.

Material Cost Variance

Usage Price
Variance Variance

Sub-usage Mix Yield

Labour Cost Variance

Variance Variance

(or)
Gang (or)
Composition

Idle Time Variance

Direct Materials Cost Variance: Direct materials cost variance is the difference between the actual direct

1. Direct Materials Price Variance: The difference between the actual and standard price per unit of
the material applied to the actual quantity of material purchased or used.
Direct materials price variance = (Standard Price minus Actual Price) x Actual Quantity, or
= (SP-AP) AQ
= (Standard Price x Actual Quantity) minus (Actual Price x Actual Quantity)
= (AQSP-AQAP)

344 COST ACCOUNTING

Causes of Material Price Variance:
a. Change in basic purchase price of material.
b. Change in quantity of purchase or uneconomical size of purchase order.
c. Rush order to meet shortage of supply, or purchase in less or more favourable market.

f. Weak purchase organisation.

g. Payment of excess or less freight.

j. Use of substitute material having a higher or lower unit price.

k. Change in materials purchase, upkeep, and store-keeping cost. (This is applicable only when such
changes are allocated to direct material costs on a predetermined or standard cost basis.)
l. Change in the pattern or amounts of taxes and duties.
2. Direct Materials Usage Variance: The difference between the actual quantity used and the amount
which should have been used, valued at standard price.
Direct materials usage variance = (Standard Quantity for actual output x Standard Price) minus
(Standard Price x Actual Quantity)
= SQSP-AQSP or
= Standard Price x (Standard Quantity for actual output minus Actual Quantity)
= SP (SQ-AQ)
Causes of Materials Usage Variance:

d. Purchase of inferior materials or change in quality of materials

g. Use of substitute materials.

h. Theft or pilferage of materials.

j. Defective machines, tools, and equipments, and bad or improper maintenance leading to
breakdowns and more usage of materials.
k. Yield from materials in excess of or less than that provided as the standard yield.

being used in subsequent processes.

m. Accounting errors, e.g. when materials returned from shop or transferred from one job to another
are not properly accounted for.

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Cost Accounting Techniques

n. Inaccurate standards

One of the reasons for materials usage variance is the change in

the composition of the materials mix. The difference between the actual quantity of material used
and the standard proportion, priced at standard price.
Mix variance = (Revised Standard Quantity minus Actual Quantity) x Standard Price.
= RSQSP-AQSP
(ii) Direct Materials Yield Variance: Yield variance is the difference between the standard cost of
production achieved and the actual total quantity of materials used, multiplied by the standard
weighted average price per unit.
Material yield variance = (Standard Yield for Actual Mix minus Actual Yield) x Standard Yield Price
(Standard yield price is obtained by dividing the total cost of the standard units by the total cost
of the standard mixture by the total quantity (number of physical units).

(1) (2) (3) (4)

SQSP RSQSP AQSP AQAP

(1-2) (2-3)
(1-3) (3-4)

(1-4)
Where
SQ = Standard Quantity for Actual Production or Output
SP = Standard Price
AQ = Actual Quantity of Materials Consumed
AP = Actual Price
RSQ = Revised Standard Quantity
1. SQSP = Standard Cost of Standard Material
2. RSQSP = Revised Standard Cost of Standard Material
3. AQSP = Standard cost of Actual Material
4. AQAP = Actual Cost of Actual Material
(a) Material Sub-Usage or Yield Variance = 1-2
(b) Material Mix Variance = 2-3
(c) Material Usage Variance = 1-3
(d) Material Price Variance = 3-4
(e) Material Cost Variance = 1-4
II. Direct Labour Cost Variance

for the activity achieved.

346 COST ACCOUNTING

1. Direct Labour Rate Variance (Wage Rate Variance): The difference between the actual and
standard wage rate per hour applied to the total hours worked.
Wages rate variance = (Standard Rate minus Actual Rate) x Actual Hours
= (SR-AR) x AH
= SRAH-ARAH
Causes of Direct Labour Rate Variances:
a. Change in basic wage structure or change in piece-work rate. These will give rise to a variance
till such time the standards are not revised.

shortage of labour of the proper category, or through mistake, or due to retention of surplus
labour.
c. Payment of guaranteed wages to workers who are unable to earn their normal wages if such
guaranteed wages form part of direct labour cost.
d. Use of a different method of payment, e.g. payment at day-rates while standards are based
on piece-work method of remuneration.
e. Higher or lower rates paid to casual and temporary workers employed to meet seasonal
demands, or urgent or special work.
f. New workers not being allowed full normal wage rates.
g. Overtime and night shift work in excess of or less than the standard, or where no provision
has been made in the standard. This will be applicable only if overtime and shift differential
payments form part of the direct labour cost.
h. The composition of a gang as regards the skill and rates of wages being different from that
laid down in the standard.
2. The difference between
the standard hours which should have been worked and the hours actually worked, valued at the
standard wage rate.
minus Actual Hours) x
Standard Rate
= (SH-AH) x SR
= SRSH-SRAH

b. Poor working conditions.

c. Delays due to waiting for materials, tools, instructions, etc. if not treated as idle time.
d. Defective machines, tools and other equipments.
e. Machine break-down, if not booked to idle time.
f. Work on new machines requiring less time than provided for, till such time standard is not
revised.

scheduling of jobs, etc.

h. Use of non-standard material requiring more or less operation time.

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Cost Accounting Techniques

i. Carrying out operations not provided for a booking them as direct wages.
j. Incorrect standards
k. Wrong selection of workers, i.e., not employing the right type of man for doing a job.
l. Increase in labour turnover.
m. Incorrect recording of performances, i.e., time or output.

variance. This variance arises due to change in the composition of a standard gang, or, combination
of labour force
Mix or Gang or Composition Variance = (Actual Hours at Standard Rate of Standard Gang) minus
(Actual Hours at Standard Rate of Actual Gang)
ii. Direct Labour Yield Variance:
variance can also be known. It is the variation in labour cost on account of increase or decrease
in yield or output as composed to the relative standard. The formula is –

Standard Output Actual

for Actual Mix
– Output

3. Idle time variance:

by the standard cost of the actual hours for which the workers remain idle due to abnormal
circumstances.
Idle time variance = (Standard rate x Actual hours paid for) minus (Standard rate x Actual hours
worked) or
= Standard Rate x Idle Hours

(1) (2) (3) (4)

SRSH SRRSH SRAH ARAH

(1-2) (2-3)
(1-3) (3-4)

(1-4)

SH = Standard Hours for Actual Production or Output

RSH = Revised Standard Hours
AH = Actual Hours

1. SRSH = Standard Cost of

348 COST ACCOUNTING

 2-3

3-4

Idle Time Variance = Idle Time Hours x Standard Rate per Hour.

Illustration 1:
Product A required 10 kg of material at a rate of 4 per kg. The actual consumption of material for the
manufacturing product A comes to 12 kg of material at the rate of 4.50 per kg.

Calculate: (a) Material Cost Variance

(b) Material Usage Variance

(c) Material Price Variance.

Solution:

Computation of Required Values

(1) SQSP = Standard Cost of Standard Material

(2) AQSP = Standard Cost of Actual Material

(3) AQAP = Actual Cost of Material

Given Values:

SQ = Standard Quantity of Material = 10 kg

AQ = Actual Quantity of Material = 12 kg

SP = Standard Price = 4 per kg

AP = Actual Price = 4.50 per kg.

(1) SQSP = (10 x 4) = 40

(2) AQSP = (12 x 4) = 48

(3) AQAP = (12 x 4.50) = 54

Computation of Required Material Variances

a. Material Usage Variance = (1) – (2) = 40-48 = 8 (A)

b. Material Price Variance = (2) – (3) = 48-54 = 6 (A)

c. Material Cost Variance = (1) – (3) = 40-54 = 14 (A)

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Illustration 2:
The standard quantity and standard price of raw material required for one unit of product A are given
as follows
Quantity (kg.) S.P. ( )
Material X 2 3
Material Y 4 2
The actual production and relevant data are as follows:
3,410
3,960
Calculate Variances. Actual production was 500 units.
Solution:
Analysis of Given Data

Standard Data Actual Data

Quantity Price Value Quantity Price Value
Material (Kg.) ( ) ( ) (Kg.) ( ) ( )
A 1000 (500 x 2) 3.00 3,000 1,100 3.10 3,410
B 2000 (500 x 4) 2.00 4,000 1,800 2.20 3,960
3000 7,000 2,900 7,370

Material SQSP ( ) RSQSP ( ) AQSP ( ) AQAP ( )

X 966.67 x 3 = 2,900 1,100 x 3

Y 1933.33 x 2 = 3,867 1,800 x 2

Total 7,000 6,767 6,900 7,370

Where (1) SQSP = Standard Cost of Standard Material = 7,000

(2) RSQSP = Revised Standard Cost of Material = 6,767
(3) AQSP = Standard Cost of Actual Material = 6,900
(4) AQAP = Actual Cost of Material = 7,370

Computation of Variances
(a) Material Sub-usage variance = (1) – (2) = 7,000 – 6,767 =
(b) Material Mix variance = (2) – (3) = 6,767 – 6,900 = 133 (A)
(c) Material Usage variance = (1) – (3) = 7,000 – 6,900 =
(d) Material price variance = (3) – (4) = 6,900 – 7,370 = 470 (A)
(e) Material cost variance = (1) – (4) = 7,000 – 7,370 = 370 (A)

350 COST ACCOUNTING

Illustration 3:

(a) Material Usage Variance

(b) Material Price Variance
(c) Material Cost Variance
Quantity of material purchased 3,000 units
Value of material purchased 9,000
Standard quantity of material required

Standard rate of material 2 per unit

Closing stock of material 500 units

Solution:
Given Values:
SQ = Standard Quantity for Actual Production = 25 x 80 = 2,000 units.
AQ = Actual Quantity = 2,500 units (3,000 units – 500 units)
SP = Standard Price = 2
AP = Actual Price = 3
(1) SQSP = Standard Cost of Standard Material = 2,000 x 2 = 4,000
(2) AQSP = Standard Cost of Actual Material = 2,500 x 2 = 5,000
(3) AQAP = Actual Cost of Material = 7,500 (2,500 units × 3 per unit)
Computation Of Material Variances:
a. Material usage variance = (1) – (2) = (4,000 – 5,000) = 1,000 (A)
b. Material price variance = (2) – (3) = (5,000 – 7,500) = 2,500 (A)
c. Material cost variance = (1) – (3)= (4,000 – 7,500) = 3,500 (A)
Illustration 4:

Quantity (Kg.) Unit Rate ( ) Total ( )

Standard:
Material A 10 2 20
Material B 20 3 60
Material C 20 6 120

Actual:
5 3 15
Material A
10 6 60
Material B
Material C 15 5 75

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Cost Accounting Techniques

Solution:
Computation of Required Values

Materials (1) SQSP ( ) (2) RSQSP ( ) (3) AQSP ( ) (4) AQAP ( )

A 10 x 2 = 20 6 x 2 = 12 5 x 2 = 10 5 x 3 = 15
B 20 x 3 = 60 12 x 3 = 36 10 x 3 = 30 10 x 6 = 60
C 20 x 6 = 120 12 x 6 = 72 15 x 6 = 90 15 x 5 = 75
200 120 130 150

Where (1) SQSP = Standard Cost of Standard Material = 200

(2) RSQSP = Revised Standard Cost of Material = 120
(3) AQSP = Standard Cost of Actual Material = 130
(4) AQAP = Actual Cost of Material = 150
Computation of Required Variances:
(a) Material Sub-Usage Variance = (1) – (2) = 200 – 120 =
(b) Material Mix Variance = (2) – (3) = 120 – 130 = 10 (A)
(c) Material Usage Variance = (1) – (3) = 200 – 130 =
(d) Material Price Variance = (3) – (4) = 130 – 150 = 20 (A)
(e) Material Cost Variance = (1) – (4) = 200 – 150 =

Material Mix Variance:

Raw Material Standard Actual

A 50 per unit 50 per unit
B 40 per unit 45 per unit
Solution:

Material Q P( ) Value ( ) Q P( ) Value ( )

A 40 50 2,000 50 50 2,500
B 60 40 2,400 60 45 2,700
100 4,400 110 5,200
Computation of Required Values

Material (1)SQSP ( ) (2) RSQSP ( ) (3) AQSP ( ) (4) AQAP ( )

A 40 x 50 = 2,000 44 x 50 = 2,200 50 x 50 = 2,500 50 x 50 = 2,500
B 60 x 40 = 2,400 66 x 40 = 2,640 60 x 40 = 2,400 60 x 45 = 2,700
4,400 4,840 4,900 5,200

352 COST ACCOUNTING

 40/100 x 110 = 44 units

Where (1) SQSP = Standard Cost of Standard Material = 4,400

(2) RSQSP = Revised Standard Cost of Material = 4,840

(3) AQSP = standard Cost of Actual Material = 4,900

(4) AQAP = Actual Cost of Material = 5,200

Computation of Required Variances:

(a) Material Sub-Usage Variance = (1) – (2) = 440 (A) [ 4,400 – 4,840]
(b) Material Mix Variance = (2) – (3) = 60 (A) [ 4,840 – 49,00]
(c) Material Usage Variance = (1) – (3) = 500 (A) [ 4,400 – 4,900]
(d) Material Price Variance = (3) – (4) = 300 (A) [ 4,900 – 5,200]
(e) Material Cost Variance = (1) – (4) = 800 (A) [ 4,400 – 5,200]

Illustration 6:
The standard material cost for 100 kg of chemical D is made up :
4 per kg
5 per kg
6 per kg

In a batch 500 kg. of chemical D were produced from a mix of

588
1,056
2,860
How do you yield mix and price of factors contribute to the variance in the actual cost per 100 kg. of
chemical D over the standard cost ?

Solution:
Analysis of Given Data

Chemical Standard Data Actual Data

Quantity Price ( ) Value ( ) Quantity Price ( ) Value ( )
A 30 4 120 28 117.60
B 40 5 200 44 211.20
C 80 6 480 88 572.00
150 800 160 900.80
50 - 60 -
100 800 100 900.80

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Cost Accounting Techniques

Computation of Required Values

Chemical (1) SQSP ( ) (2) RSQSP ( ) (3) AQSP ( ) (4) AQAP ( )

A 30 × 4 32.00 x 4 28 x 4 117.60
=120 = 128.00 = 112.00
B 40 × 5 42.67 x 5 44 x 5 211.20
= 200 = 213.35 = 220.00
C 80 × 6 85.33 x 6 88 x 6 572.20
= 480 = 512.00 = 528.00
800.00 853.35 860.00 900.80
Computation of RSQ:
SQ for that product
RSQ = x AQ for that product
SQ for all product

30
x 160 = 32.00 units.
150

40
x 160 = 42.67 units.
150

80
x 160 = 85.33 units.
150

Where (1) SQSP = Standard cost for Standard material = 800

(2) RSQSP = Revised standard cost of material = 853.35
(3) AQSP = Standard cost of actual material = 860.00
(4) AQAP = Actual cost of material = 900.80
Computation of Required Variances
(a) Material Yield variance = (1) – (2) = 53.35 (A) [ 800 – 853.35]
(b) Material Mix variance = (2) – (3) = 6.65 (A) [ 853.35 – 860]
(c) Material usage variance = (1) – (3) = 60 (A) [ 800 – 860]
(d) Material price variance = (3) – (4) = 40.80 (A) [ 860 – 900.80]
(e) Material cost variance = (1) – (4) = 100.80 (A) [ 800 – 900.80]
Illustration 7:

Material Standard Quantity Price Total

(Kg.) ( ) ( )
A 500 6.00 3,000
B 400 3.75 1,500
C 300 3 900
1,200
5,400
120
1,080 5,400

354 COST ACCOUNTING

 Material Actual Quantity Price Total
A 400 6.00 2,400
B 500 3.60 1,800
C 400 2.80 1,120
1,300
5,320
220
1,080 5,320
Calculate:
a. Material Cost Variance
b. Material Price Variance
c. Material Mix Variance
d. Material Yield Variance
e. Material Usage Variance
Solution:
Computation of Required Values

SQSP (1) ( ) RSQSP (2) ( ) AQSP (3) ( ) AQAP (4) ( )

A 3,000 541.67 x 6 = 3,250 400 x 6 = 2,400 2,400
B 1,500 433.33 x 3.75 = 1,625 500 x 3.75 = 1,875 1,800
C 900 325 x 3 = 975 400 x 3 = 1,200 1,120
5400 5,850 5,475 5,320
Computation of RSQ:
500
x 1,300 = 541.67 units.
1,200
400
x 1,300 = 433.33 units.
1,200
300
x 1,300 = 325.00 units.
1,200
Where
1. SQSP = Standard Cost for Standard Material = 5,400
2. RSQSP = Revised Standard Cost of Material = 5,850
3. AQSP = Standard Cost of Actual Material = 5,475
4. AQAP = Actual Cost of Material = 5,320
Computation of Required Variances
a. Material Yield Variance = (1) – (2) = 450 (A) [ (5,400 – 5,850)]
b. Material Mix Variance = (2) – (3) = (5,850 – 5,475)]
c. Material usage variance = (1) – (3) = 75 (A) [ (5,400 – 5,475)]
d. Material price variance = (3) – (4) = (5,475 – 5,320)]
e. Material cost variance = (1) – (4) = (5,400 – 5,320)]

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Illustration 8:
A manufacturing concern which has adopted standard costing furnishes the following information.
Standard

Price of materials Re.1 per kg

Actual

Output 2,10,000 kg.

Material used 2,80,000 kg.
Cost of materials 2,52,000
Calculate:
a. Material Usage Variance
b. Material Price Variance
c. Material cost Variance

Solution:
Computation of Required Values

(1) SQSP ( ) (2) AQSP ( ) (3) AQAP ( )

[2,10,000 x 100/70] x 1 2,80,000 x 1
3,00,000 2,80,000 2,52,000

Computation of Required Variances:

a. Material Usage Variance = (1) – (2) =
b. Material Price Variance = (2) – (3) =
c. Material Cost Variance = (1) – (3) =

2.25 per kg.

In a cost period:

2.25 per kg.

2.15 per kg.

Consumption 110 kg.

Calculate: a) Usage b) Price variance

1) When variance is calculated at point of purchase

356 COST ACCOUNTING

Solution:
a) Computation of Material Usage Variance
Material Usage Variance = SQSP – AQSP
= SP (SQ – AQ)
= 2.25(100-110)
= 22.50 (A)
b) Computation of Price variance:
1) When Variance is calculated at the point of purchase:
Price variance = AQSP – AQAP
= (110 x 2.25) – (110 x 2.15)

2) When variance is calculated at the point of issue on FIFO basis

Price variance = AQSP – AQAP

3) When variance is calculated at the point of issue on LIFO basis

Price variance = AQSP – AQAP
= (110 x 2.25) – (110 x 2.15)
= 247.50-236.50

Using the following information calculate each of three labour variance for each department.

Dept X Dept Y
Gross wages direct ( ) 28,080 19,370
Standard hours produced 8,640 6,015
Standard rate per hour ( ) 3 3.40
Actual hours worked 8,200 6,395

Solution:
Dept. X : Computation of Required Values

SRSH (1) SRAH (2) ARAH (3)

3 x 8640 3 x 8200
25,920 24,600 28080

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Cost Accounting Techniques

(25,920 – 24,600)]
3,480 (A) [ (24,600 – 28,080)]
2,160 (A) [ (25920 – 28,080)]

Dept. Y Computation of Required Values

SRSH (1) ( ) SRAH (2) ( ) ARAH (3) ( )

3.4 x 6,015 3.4 x 6,395
20,451 21,743 19,370
1,292 (A)

Illustration 11:
Calculate variances from the following:

STANDARD ACTUAL
INPUT MATERIAL ( ) TOTAL INPUT MATERIAL ( ) KG TOTAL
400 A 20,000 420 A 18,900
200 B 4,000 240 B 6,000
100 C 1,500 90 C 1,350
700 25,500 750 26,250
LABOUR HOURS LABOUR HOURS
2 per hour 200 2.50 per hour 300
1.50 300 500 1.60 384 684
25 75
675 26000 675 26,934

Solution:
Calculation of Material Variances:

(1) (2) (3) (4)

SQSP ( ) RSQSP ( ) AQSP ( ) AQAP ( )
A 428.57 x 50 420 x 50
B 214.29 x 20 240 x 20
C 107.14 x 15 90 x 15
A 20,000 21,429 21,000 18,900
B 4,000 4,289 4,800 6,000
C 1,500 1,607 1,350 1,350
25,500 27,325 27,150 26,250

358 COST ACCOUNTING

 RSQ for
A = 400/700 x 750 = 428.67 units
B = 200/700 x 750 = 214.29 units
C = 100/700 x 750 = 107.14 units
1. SQSP = Standard Cost of Standard Material = 25,500
2. RSQSP= Revised Standard Cost of Material = 27,325
3. AQSP= Standard Cost of Actual Material = 27,150
4. AQAP = Actual Cost of Material = 26,250
a. Material Yield Variance (1-2) = 1,825 (A)
b. Material Mix Variance (2-3) =
c. Material Usage Variance (1-3) = 1,650 (A)
d. Material Price Variance (3-4) =
e. Material Cost Variance (1-4) = 750 (A)

Calculation of Labour Variances:

(1) (2) (3) (4)

SRSH ( ) SRRSH ( ) SRAH ( ) ARAH ( )
Men 2 x 107.14 2 x 120
Women 1.50 x 214.28 1.50 x 240
Men 200 214.28 240 300
Women 300 321.42 360 384
500 536 600 684
RSH for
Men = 100/700 x 750 = 107.14 units.
Women = 200/700 x 750 = 214.28 units.
500
536
600
684
36 (A)
64 (A)
100 (A)
84 (A)
184 (A)

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Cost Accounting Techniques

Illustration 12:
The standard labour complement and the actual labour complement engaged in a week for a job
are as under:
Skilled Semi-skilled Unskilled
workers workers workers
a) Standard no. of workers in the gang 32 12 6
b) Standard wage rate per hour ( ) 3 2 1
c) Actual no. of workers employed in the gang during
28 18 4
the week
d) Actual wage rate per hour ( ) 4 3 2
During the 40 hour working week the gang produced 1,800 standard labour hours of work. Calculate

Solution:
Analysis of Given Data
Standard Data Actual Data
Hours Rate ( ) Value ( ) Hours Rate ( ) Value ( )
Skilled 32 × 40 = 1,280 3 3,840 28 × 40 = 1,120 4 4,480
Semi skilled 12 × 40 = 480 2 960 18 × 40 = 720 3 2,160
Unskilled 6 × 40 = 240 1 240 4 × 40 = 160 2 320
2,000 5,040 2,000 6,960
Computation of Required Values
SRSH 1 ( ) SRRSH 2 ( ) SRAH 3 ( ) ARAH 4 ( )
Men 3 x 1,152 3,840 3 x 1,120 4,480
= 3,456 = 3,360
Women 2 x 432 960 2 x 720 2,160
= 864 = 1,440
Boys 1 x 216 240 1 x 160 320
= 216 = 160
4,536 5040 4,960 6,960
Computation of SH

SH for that worker

SH = x AQ for that worker
SH for all the worker

1,280
1,800 = 1,152
2,000
480
1,800 = 432
2,000

240
1,800 = 216
2,000

360 COST ACCOUNTING

 4,536
5,040
4,960
6,960

Computation of Labour Variances:

504 (A) [ (4,536 – 5,040)]
(5,040 – 4,960)]
424 (A) [ (4,536 – 4,960)]
2,000 (A) [ (4,960 – 6,960)]
2,424 (A) [ (4,536 – 6,960)]

Illustration 13:
A chemical company gives you the following standard and actual data of its Chemical No.1456. You
are required to calculate variances (material).

Standard Data
450 20 per kg. 9,000
360 10 per kg. 3,600
810 12,600

2 4,800
1 1,200

90 Normal loss
720 18,600

Actual Data

450 19 per kg. 8,550

360 11 per kg. 3,960
810 12,510
2.25 5,400
1.25 1,500

50 Normal loss
760 19,410

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Cost Accounting Techniques

Solution:
Computation of Required Values

Material SQSP (1) RSQSP (2) AQSP (3) AQAP (4)

A 475 x 20 9,000 450 x 20
= 9,500 = 9,000
B 380 x 10 3,600 360 x 10
= 3,800 = 3,600
13,300 12,600 12,600 12,510
Computation of Sq:

SQ for that material

SQ = × AQ for that material
SQ for all material

450
760 = 475 units.
720

360
760 = 380 units.
720

Where (1) SQSP = Standard Cost of standard Material = 13,300

(2) RSQSP = Revised Standard Cost of Material = 12,600

(3) AQSP = Standard Cost of Actual Material = 12,600

(4) AQAP = Actual Cost of Material = 12,510.

Computation of Required Variances:

a. Material Yield Variance = (1) – (2) = (13,300 – 12,600)]

b. Material Mix Variance = (2) – (3) = Nil [ (12,600 – 12,600)]

c. Material Usage Variance = (1) – (3) = (13,300 – 12,600)]

d. Material Price Variance = (3) – (4) = (12,600 – 12,510)]

e. Material Cost Variance = (1) – (4) = (13,300 – 12,510)]

362 COST ACCOUNTING

MULTIPLE CHOICE QUESTIONS:
1. Excess of actual cost over standard cost is known as
A. Abnormal effectiveness
B. Unfavourable variance

D. None of these.
2. Difference between standard cost and actual cost is called as
A. Wastage

C. Variance

3. Standards cost is used

A. To ascertain the breakeven point

4. Standard price of material per kg 20, standards consumption per unit of production is 5 kg.
Standard material cost for producing 100 units is
A. 20,000
B. 12,000
C. 8,000
D. 10,000
5. Standard cost of material for a given quantity of output is 15,000 while the actual cost of material
used is 16,200. The material cost variance is:
A. 1,200 (A)
B. 16,200 (A)
C.
D. 31,200 (A)

7. Cost variance is the difference between

A. The standard cost and marginal cost
B. The standards cost and budgeted cost
C. The standards cost and the actual cost
D. None of these

COST ACCOUNTING 363

Cost Accounting Techniques

8. Standard price of material per kg is 20, standard usage per unit of production is 5 kg. Actual
usage of production 100 units is 520 kgs, all of which was purchase at the rate of 22 per kg.
Material usage variance is
A.
B. 400 (A)
C.
D. 1,040 (A)
9. Standard price of material per kg is 20, standard usage per unit of production is 5 kg. Actual
usage of production 100 units is 520 kgs, all of which was purchase at the rate of 22 per kg.
Material cost variance is
A. 2,440 (A)
B. 1,440 (A)

8 per kg. Actual output during a

given period is 800 units. The standards quantity of raw material
A. 8,000 kgs
B. 6,400 Kgs
C. 64,000 Kgs
D. None of these.
[Ans: B, C, C, D, A, B, C, B, B, A]

State whether the statements are True or False:

1. Excess of Actual cost over Standards Cost is treated as unfavourable variance.

2. Variances are calculated for both material and labour.

4. Under the system of standard costing, there is no need for variance analysis.

5. Standard costing is an ideal name given to the estimate making.

8. Material cost variance and labour cost variance are always equal.

accountant.

industries.

364 COST ACCOUNTING

Fill in the Blanks:

1. Standard cost is a ___________ cost.

3. Historical costing uses post period costs while standards costing uses _____________ costs.

4. Three types of standards are ____________________.

5. The _____________ is usually the co-ordinator of the standards committee.

7. Basically there are two types of standards viz, a) Basic standards, and ___________.

8. When actual cost is less than the standards cost, it is known as _________________ variance.

9. Standard Costing is one of the __________________ techniques.

10. Standard means a criterion or a yardstick against which actual activity can be compared to
determine the ______________ between two.

[Ans. Predetermined, Standard cost, Predetermined, Current, basic and Normal standard, Cost

Match the following:

Column A Column B
1. Direct material yield variance A (Standard hour for actual production minus
Actual hours) x Standard Rate
2. B (Actual Hours at standard rate of standard
gang) minus (Actual Hours at standards Rate of
Actual Gang)
3. Material price variance C Management by Exception
4. Variance Analysis D (Standard Rate minus Actual Rate) x Actual
hour
5. Direct labour yield variance E (Standard rate x Actual hours paid for) minus
(Standard rate x Actual hours worked)
6. (Standard price minus Actual Price) X Actual
Quantity
7. Direct material mix variance G (Standard Quantity for actual output X Standard
Price) minus (Standard price X Actual Quantity)
8. Gang variance H Standard cost per unit x (Standard output for
actual mix – Actual output)
9. Ideal time variance I (Standard yield for actual Mix minus Actual
Yield) x Standard yields Price.
10. Direct material usage variance (Revised Standard Quantity minus Actual
Quantity) X Standard Price

COST ACCOUNTING 365